441. Memorandum From Secretary of State Muskie to President Carter1
SUBJECT
- Debt Rescheduling for Pakistan
Our response to Pakistan’s long-standing request for external debt rescheduling has emerged as the critical short-term element in our continuing effort to build a cooperative relationship with Pakistan in the wake of the Soviet invasion of Afghanistan.2 I believe that the time has come for us to make an exception to our normal debt rescheduling policy, permitting us to join in a multilateral rescheduling of Pakistan’s debt contingent only on satisfactory economic reforms (and not on “imminent” or “emerging” default.)
This issue will be discussed at the meeting of the Aid to Pakistan Consortium June 12. This memorandum sets forth our reasoning on this issue and presents options for dealing with its budgetary implications.
[Page 1006]US-Pakistan Relations:
Our efforts to strengthen our relations with Pakistan got off to a shaky start when Pakistan turned down our initial offer of military and economic assistance. Since then, however, Pakistan has made clear that it does want our economic help, with debt rescheduling as its top priority. For our part, we have continued to enunciate a policy of seeking to strengthen the states in South and Southwest Asia in order to deter future Soviet adventurism.
Because of our budgetary austerity, you ruled out any additional FY 81 economic aid funds for Pakistan some months ago.3 However, given our earlier offer and our continued emphasis on the importance of the regional countries, Pakistan clearly expects us to come up with some form of economic support, and others—Germany, Japan and Saudi Arabia—will see our actions toward Pakistan as indicative of our seriousness about the area. Without either aid or debt rescheduling, the US will be a net recipient of funds from Pakistan in FY 81 (our $40 million in PL 480 and estimated $40 million in disbursements from old aid projects will be more than offset by the $120 million Pakistan owes us). If we fail to provide any resources before FY 82, it would confirm Pakistan’s disposition to doubt our commitment to their security. As a result, we could see a reorientation of Pakistan’s foreign policy, including a move toward some form of accommodation with the Afghan regime.
With aid ruled out, the only possibility we have for responding to Pakistan’s economic needs before FY 82 is to make a limited exception to our debt rescheduling policy. We traditionally treat debt rescheduling as a measure designed solely to ensure repayment of international obligations. Our latest formulation of debt policy applicable to Pakistan stipulates that we would participate in a multilateral rescheduling in conjunction with an upper tranche IMF agreement if an “emerging default situation seems likely.”
We cannot now predict that Pakistan faces default in the coming year. The Saudis and other Persian Gulf countries are likely to provide as much as $1 billion in aid, but clearly expect that much of this will be offset by military purchases and in any event disbursements may be stretched out.
An exception to our normal debt relief policy under which we would agree to reschedule in conjunction with an IMF upper tranche agreement, without insisting on imminent default, would permit us to give some substance to our stated goal of providing support for Paki [Page 1007] stan. Though it is unlikely to bring about a dramatic improvement, it could help slow the deterioration in US-Pakistan relations.
The other members of the Aid to Pakistan Consortium are willing to reschedule on the basis of an IMF upper tranche agreement. We are the only donor who remains firm on the default criterion. Pakistan knows that we are the lone hold-out, and an exception to our normal policy would bring our view into line with our allies’. We understand that the Germans may be considering rescheduling their debt bilaterally, even without USG agreement, so a change in US policy would avert an embarrassing break in Allied solidarity.
This exception to our policy would consequently be a significant demonstration to our allies and Japan, who have expressed their concern about debt relief for Pakistan, that we are prepared to back up in a concrete way the leadership we asserted earlier in responding to the Soviet invasion of Afghanistan. Similarly, we would show the Saudis that we are willing to make extraordinary efforts to complement their stated intent to organize contributions to Pakistan from themselves and the Gulf states totalling perhaps $1 billion.
It is possible that Pakistan would not meet our requirement for economic reforms, in which case there would be no rescheduling. If the GOP did work out an upper tranche IMF agreement, however, this would involve badly needed economic reforms. Without these, Pakistan and ultimately its creditors could be facing serious and even unmanageable deterioration in Pakistan’s financial position in the next few years.
I recognize that there are real costs inherent in deviating from our standard debt rescheduling policy. The principal ones, as we see it, are that the use of debt relief to assist Pakistan will provoke Congressional efforts to limit further the ability of the Executive Branch to reschedule without appropriations, possible accusations from the Hill that we are trying to circumvent the Symington Amendment’s aid ban, and the pressure we will face to provide similar treatment for other countries. I have examined these objections carefully and believe they are outweighed by overriding political considerations. The first two I believe can be contained by careful Congressional consultation, and the third by making it clear that our reasons for this unusual action toward Pakistan stem from unique political circumstances.
Our preliminary soundings on the Hill suggest that support for assistance to Pakistan remains strong. There is a reluctance to reschedule debt, but no actual opposition to this as a unique case. There is no enthusiasm, but general agreement that this is a sensible approach to maintaining an important relationship with Pakistan.
Debt rescheduling would involve postponing about $70–110 million in budgetary receipts of which just under half consists of principle [Page 1008] repayments which would normally be credited to the international affairs function of the budget. In the past we have not made special provision in the budget for rescheduling. In this case, however, our determination to balance the budget, and the fact that Pakistan is not in a default situation make it necessary to deal with the budgetary effect.
We have considered and ruled out the option of looking for an offsetting cut in net outlays in the international affairs function. The budget for this function has been seriously cut by the Budget Committees, and the foreign policy costs of any further cuts would be higher than the costs of doing nothing for Pakistan.
I consequently recommend that we treat the loss of receipts due to rescheduling as a claim on the Reserve for Contingencies of the General Budget. The reserve now stands at $500 million. This would be somewhat unusual, given the presumption in normal budget procedures that net outlays will be offset from within the same function of the budget. However, this is how we expect to handle our FY 81 rescheduling for Turkey (approximately $250 million). This would permit us to provide some economic support promptly, reaping the maximum benefits of the policy exception we are recommending.
Some would agree to a policy change now but suggest that we work out some formula with Pakistan and the other creditors whereby most or all of the US participation would take place in FY 82 or thereafter. This would considerably reduce the benefits we would hope to gain from a change in policy. The Pakistanis and the other creditors would be annoyed that we would not be willing to participate in rescheduling for another 16 months. Moreover, it would not relieve Pakistan’s FY 81 financial problems. It would also present technical difficulties with the other creditors, and would only postpone, but not ameliorate, any difficulties we may face on the Hill.
Recommendation:
That we make an exception for Pakistan to our debt rescheduling policy, and state our willingness to participate in a multilateral rescheduling in conjunction with an upper tranche IMF agreement. If you approve, we would treat the loss of receipts from a Pakistan rescheduling as a claim on the reserve for contingencies of the general budget.4
- Source: Carter Library, National Security Affairs, Staff Material, Office, Presidential Advisory Board, Box 85, Sensitive XX: 6/1–24/80. Secret. Sent to the President under cover of a June 6 memorandum from McIntyre and Owen; see Document 444.↩
- In telegram 4900 from Islamabad, May 21, Hummel appealed directly to Muskie to “suggest that we need to have a whole new look at our policies and actions in Pakistan, especially as they relate to the Afghan situation.” Hummel stressed the importance of debt rescheduling, P.L. 480 assistance, and grants for the relief of Afghan refugees in Pakistan. (National Archives, RG 59, Central Foreign Policy File, P870097–0461) Telegram 4900 is printed in Foreign Relations, 1977–1980, vol. XII, Afghanistan, Document 274.↩
- See Document 432.↩
- Carter checked the Approve option, below which he initialed “J.”↩